Social Enterprises and Benefit Corporations in Spain

Abstract

This chapter provides an overview of the legal framework for social enterprises in Spain and portrays the benefit-corporation phenomenon from the perspective of the Spanish law. The former is presided over by Ley 5/2011, de 29 de marzo, de Economía Social (LES), the main conceptual and policy aspects of which are discussed in this chapter. On the latter, since benefit corporations are not regulated in Spain, the contribution draws up their identifying elements from both a comparative methodology and a failed proposal for a general interest private limited liability company (S.L.I.G.). We consider benefit corporations and their applicable regime within the everlasting debate on the role of profit—both objective and subjective—as part of the cause of the company contract. Against this background, this chapter provides three theoretical models for benefit corporations under the Spanish company law and assesses how they may be adapted into the articles of association. We then examine how core finance and governance aspects may be touched, namely, the distribution of profits, directors’ duties, and shareholder protection mechanisms. The chapter supports the view that benefit corporations may be lawfully formed de lege lata under the Spanish companies and social enterprise law, although significant regulatory amendments are advisable to smoothen the process.

This chapter is part of Research Projects “Gobierno corporativo y creación de valor compartido” (PID2020-112624GA-I00) and “Innovación social corporativa desde el Derecho y la Economía (INNSOCIAL)” (UAL2020-SEJ-C2085). The author is grateful to Ana Montiel for her valuable information on empirical and practical data.

1 Introduction

This chapter provides an overview of the legal framework for social enterprises in Spain and focuses on the benefit-corporation phenomenon vis-à-vis the Spanish law. First, on the landscape of social enterprises, we describe the main conceptual and regulatory challenges they face in this country. Spain follows a traditional regulatory approach, which is only partially aligned with the EU’s most recent initiatives and proposals for this field. We review how this is shown in Ley 5/2011, de 29 de marzo, de Economía Social (LES). Second, the chapter discusses whether benefit companies may be formed under the Spanish company law, and we discuss their placement within the Spanish legal framework for social enterprises. The chapter delves into the obstacles founders may face in establishing such a hybrid entity, both from a theoretical perspective and in practical terms, from the company’s creation and throughout its life cycle. It also compares this background to proposals fostered by social advocacy actors. This includes a critical review of the sociedad limitada de interés general (S.L.I.G.) initiative and an examination of the amendments to the articles of association that certified B Lab Spain B-Corps shall adopt.

2 Overview and Legal Framework

This section features the legal framework for social enterprises, particularly benefits companies. To set the scene, it describes Spain’s current approach to each of them as well as the foreseeable regulatory strategies for their advancement.

2.1 Social Enterprises (SEs)

The notion of social enterprises (SE) in Spain is driven by the EU’s regulatory initiatives in the matter, as well as from the comparative framework. The concept is confined to particular types of private business organisations that are required by law to pursue general or community interest purposes.¹ This kind of objective renders them different from both mutual-purpose and profit-driven entities.² SEs shall carry out social utility enterprises and, as opposed to more traditional non-profits, shall not simply adopt donative models and are able to distribute profits among their members.³ Only entities that fulfill these requirements may be certified as qualified SEs. However, Spain has not taken any general legislative action in this field. In this vein, as discussed in this chapter, de lege lata, no general company type is particularly amenable to the features of SE, although private limited liability companies may be more easily adapted. In turn, the prevailing view considers that three available business forms in Spain fulfill the requirements of SEs: some kinds of cooperative societies, work-integration enterprises, and special employment centers may qualify as SEs.⁴ Each entity is regulated separately. First, not any cooperative society, but only social initiative cooperative societies, as established in Article 106 of Ley 27/1999, de 16 de julio, de Cooperativas qualify as SEs. Cooperative societies that mainly pursue mutualistic purposes are excluded. Second, under Article 4 Ley 44/2007, de 13 de diciembre, para la regulación del régimen de las empresas de inserción, work integration enterprises are either business partnerships and companies (sociedades mercantiles) or cooperative societies that are established to integrate and educate persons at risk of social exclusion. Special employment centers are provided for in Real Decreto 2273/1985, de 4 de diciembre, por el que se aprueba el Reglamento de los Centros Especiales de Empleo definidos en el artículo 42 de la Ley 13/1982, de 7 de abril, de Integración Social del Minusválido. According to Article 1 of the royal decree, their goal is to engage in entrepreneurial activities with the purpose of employing people with disabilities.

Cooperative societies, work integration enterprises, and employment centers are also social economy entities, but the latter is a broader category than SE.⁵ Social economy entities are defined under the Spanish law as the ensemble of economic and business activities undertaken by private organisations to pursue either their members’ collective interests, an economic or social general interest, or both (Art. 2 LES). Here again, the notion of entities of the social economy in the Spanish Act is overarching and includes mutual entities that do not embrace the general interests of either an economic or a social nature. Article 2 of the LES requires that social economy entities be managed in accordance with the values laid down in Article 4 of the LES, including (i) the primacy of individual and social goals, (ii) the reinvestment of any surpluses, (iii) an internal solidarity-based model, and (iv) autonomous management independent of public authorities. In this way, the approach taken by the domestic Spanish act on social enterprises is rather stringent when compared to recent developments in the field of SE. First, because the act is transversal, it merely defines and seeks to promote entities of the social economy in full compliance with their respective applicable frameworks (Art. 1 and 5.3 LES). Second, and more significantly, the act provides a closed list of business forms that may qualify as social entrepreneurship entities (Art. 5.1 LES) alongside an enabling provision (Art. 5.2 LES).

The subjective scope of application in Article 5.1 LES covers cooperative societies, mutual societies, foundations, and associations that undertake economic activities, employee-owned public and private companies (sociedades laborales), work-integration enterprises, so-called special employment centers, fishermen associations (cofradías de pescadores), agricultural associations, and any other ad hoc entities, for instance, the Spanish Red Cross (Art. 5.1 LES). These are traditional entities in the social economy.⁶ Here, private and public limited liability companies other than those that are employee-owned, even those that adopt social economic values, are excluded.⁷ Article 5.2 LES takes a broader approach by establishing that other private entities may qualify as entities of the social economy as long as they conduct their activities in compliance with the values laid down in Article 4 of the LES, and they are listed as entities of the social economy by the Spanish Ministry of Labour (Art. 5.2 LES). Thus, the numerus clausus approach in Article 5.1 LES is nuanced enough to establish an open-ended system.⁸ According to the Black Letter of Law, non-traditional business models, especially companies, may also acquire this status under Article 5.2 LES.⁹ Because these are private entities that do not per se belong to the social economy or comply with their values, they may only acquire this status as long as their applicable law leaves room for necessary amendments. Whether this may be the case requires a prior assessment by the Ministry of Labour, resulting in the inclusion of each suitable business form in the catalogue foreseen in Art. 6 LES.¹⁰ In the current legal framework, the same type of concern affects companies that become SEs. In the absence of specific legal intervention, party autonomy is likely to be seriously burdened by transaction costs when adapting private limited liability companies to both the social economy and SEs.

By allowing a wider range of entities to be listed as entities of the social economy in a broader sense, Article 5.2 LES conforms to the latest EU initiatives, even those published after the LES was passed,¹¹ as well as to prevailing scholarly opinion.¹² In this way, the Spanish LES did not establish any specific entity but rather leaned toward an enabling regime. A similar approach is likely to be adopted to regulate the SEs.¹³ However, the enabling system is usually regarded as being unsatisfactory on several grounds, and these caveats can be considered to assess SEs. First, to date and over a decade after the enactment of the LES, the Spanish Ministry of Labour has not established the catalogue set forth in Articles 5.2 and 6 LES, which hampers the advancement of alternative business forms as entities of the social economy.¹⁴ In addition, such a catalogue-based model is naturally restricted in scope because it does not address the obstacles that non-traditional SE business forms typically face in adopting SE values.¹⁵ These arise from their own applicable regime and can only be confronted on a case-by-case basis, which calls for specific amendments to the law on each business form.¹⁶ In this vein, in force, company law may trim the adoption of social entrepreneurship values by companies, an issue the chapter further discusses vis-à-vis benefit corporations.

On a different note, the prevailing scholarly opinion favoured a broader general clause in Article 5.1 LES, which was finally rejected.¹⁷ We support the view that a disclosure system for non-traditional business forms such as SEs, which is similar to that foreseen in Article 6 LES, would enhance their visibility and is likely to foster policy discussions on the necessary regulatory amendments that may benefit each business form.¹⁸ A specific certification and transparency regime for non-traditional SE business forms seems particularly fitting. This may be adopted transversally within the LES as part of a future harmonised certification system for SEs.¹⁹ It shall also be pursued on a case-by-case basis, as the experience of benefit corporations in the comparative framework shows. In this connection, the supervision of compliance with social economic values and requirements is pending further regulation.²⁰ A single national register for social businesses, both entities of the social economy and SE forms, would face obstacles both at the conceptual and organisational levels and on the distribution of regulatory authority between the Spanish State and the Comunidades Autónomas.²¹

2.2 Benefit Corporations

Spain has not passed specific provisions on social enterprises, including benefit companies, and to date, the legislature does not envisage any regulatory initiative in this field. However, legal scholars, practitioners, and private policy proponents have fostered the debate around hybrid company forms that balance profit-making with the protection or enhancement of other not-for-profit interests. In Spain, entrepreneurs predominantly resort to private companies limited by shares (sociedades de responsabilidad limitada, or S.L.) or, to a much lesser extent, to public companies limited by shares (sociedades anónimas, or S.A.).²² Historical and market-specific factors explain why partnerships are not popular legal forms in the Spanish business environment.²³ For this reason, this chapter mainly focuses on benefit companies, while leaving civil and commercial partnerships aside. Accordingly, from a policy perspective, the Spanish legislature would lean toward a specific-form approach by enabling benefit companies solely as a special form of private companies.²⁴ This was the case of the sociedad limitada de interés general (S.L.I.G.), a failed legislative proposal on a benefit corporation for Spain.²⁵ In this way, the policy option was similar to the German proposal for a Gesellschaft mit beschränkter Haftung in Verantwortungseigentum. ²⁶ This methodological approach deviates from that adopted by other jurisdictions such as Italy and France, where overarching benefit models have been envisioned.²⁷

On the academic side, the discussion focuses on the applicable legal framework in which benefit—or, simply, not-for-profit—companies will appear. This usually results in scholarly debates around core company law concepts, namely, the cause of the company contract, the interest of the company, and the directors’ duties toward it, as well as shareholder protection vis-à-vis majority and managerial abuse and third-party interests. Although to a lesser extent, this discussion also stems from the realm of social entrepreneurship. On the practitioner side, problems usually arise during the registration phase for companies with social interests. In Spain, articles of association are subjected to strict formal and material legality control by the Commercial Register (Registro Mercantil). For this reason, provisions in the articles of associations enabling hybrid purposes or giving directors leeway to consider other interests will be closely scrutinised, sometimes resulting in denied access to the register.

Today, policymaking is mainly fostered by private actors. Upsocial, a civil association based in Barcelona, put forward an initiative for a general interest private limited liability company (sociedad limitada de interés general or S.L.I.G.). In 2013, the project was presented as a legislative proposal by the Grupo Parlamentario Catalán (Convergència i Unió) but was rejected by the lower chamber of Parliament (Congreso de los Diputados).²⁸ For years, the proposal went almost unnoticed by company law scholars, and only sporadic references within the social economy literature were be found.²⁹ From a company law perspective, the legislative technique left room for improvement and included a large number of concepts that were familiar to social economy entities but foreign to private companies.

In recent years, the B Lab Spain foundation has established a benefit certification system. Since 2014, 74 entities have been certified as B-Corps after successfully adopting B Lab Spain’s guidelines, including the active pursuit of a stakeholder’s interest (typically, workers, the environment, clients, or local communities).³⁰ Additionally, 2462 entities have signed up to have their so-called b impact assessed, which again includes an evaluation of their governance, workers, environmental and local communities, and client-related standards.³¹ Certification is granted only after introducing several amendments to the articles of association to include the interests of other stakeholders.³²

Against this background, to explore the formation of a benefit company under Spanish law, the following legal provisions are considered. Public and private companies are regulated under the Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital. (LSC), which is a comprehensive company act. However, the Act does not address the contract by virtue of which a company is formed (contrato de sociedad), which is referred to more general provisions contained in the Spanish Commercial Code (Articles 19.1 LSC and 116.1 CdC, respectively).³³ Commercial law provisions refrain from defining contracts regulated under the civil law. Instead, they are confined to establishing requirements under which such contracts are deemed commercial in nature. As a result, the definition of a company contract must be sought in the Civil Code (Art. 1665 CC).³⁴ The provisions deal exclusively with partnerships, but these are the essential forms of business association upon which the entire system is built. Partnership law, namely, rules on purely contractual aspects, is also a default rule applicable to companies (Arts. 2 and 50 CdC). For the sake of simplicity, we refer to the contract giving rise to a company as a “company contract”, notwithstanding the fact that the relevant provisions actually refer to civil and commercial partnerships.³⁵ The wording is not problematic in Spanish since the term sociedad also designates civil and commercial partnerships (sociedades civiles and mercantiles, respectively).

The Spanish contract law system has historically been influenced by French law, which is also reflected in company law. As with other French-influenced jurisdictions, the cause is considered one of the three essential elements of a contract (Art. 1261.3 CC).³⁶ In the case of a company contract, the cause is regarded as the aim of pursuing profit to distribute it among shareholders, as foreseen by Arts. 1665 CC and 116.1 CdC. Civil and commercial partnerships are consistently defined as contracts in which the parties (members or partners) share the common goal of pursuing profit and distributing it among themselves. For years, legal scholars and courts have intensively discussed whether companies may be formed in pursuit of non-profitable goals in light of Articles 1665 CC and 116.1 CdC.

According to the general understanding, profit is a two-fold concept, and a distinction is usually drawn between objective and subjective profit. Many EU Member States are familiar with this duality, but the Spanish debate was strongly influenced by Italian academic discussion.³⁷ Objective profit refers to the net (positive) economic result of an activity’s exploitation.³⁸ Authors have sometimes fostered a broader understanding of objective profit as mere creation of advantages for members or partners.³⁹ Subjective profit refers to the distribution of the latter among shareholders.⁴⁰ It is usually regarded as the key element upon which the distinction between for-profit and third-sector entities is built; the non-distribution constraint typically defines the scope of non-profit entities.⁴¹ Benefit companies have disrupted this paradigm. Their hybrid character goes beyond that of pre-existing forms such as cooperative societies.⁴² As can be noted, the emergence of benefit companies also poses new challenges in terms of fundamental freedoms in the internal market, since not-for-profit entities fall out of the scope of freedom of establishment (Art. 54 in relation to Art. 49 TFEU). As the line between profit and not-for-profit dilutes, consistent policy adaptation is required.⁴³

Within this framework, Spanish scholars and courts have dealt with the role of profit within the concept of sociedad (Arts. 1665 CC and 116.1 CdC). In line with other continental systems such as those of France and Italy, Spanish policymakers have historically mistrusted private associations pursuing non-profitable purposes. This explains why regulations on both civil and commercial partnerships define them as business associations that pursue economic goals. Today, constitutions recognise the fundamental freedom of association (Art. 22 of the Spanish Constitution, CE) and other related freedoms, such as the right to own property (Art. 33 CE), the right to create foundations (Art. 34 CE), and the freedom of enterprise (Art. 38 CE). Consequently, reluctance toward non-profitable organisations is no longer a policy reason to preserve the for-profit requirement.⁴⁴ Since the 1960s, scholarly efforts have pushed for a broader understanding of the general concept of sociedad, one in which profit is not an essential requirement but where any lawful common purpose is deemed sufficient.⁴⁵ These proposals are sustained by political, systematic, and comparative legal arguments and may be considered the currently prevailing scholarly opinion among private lawyers.⁴⁶ They are further supported by the fact that the legislature in aligned jurisdictions, such as France or Italy, has already accepted a more flexible approach. France added nuance to its strict for-profit requirement by introducing the need to consider environmental concerns and enabling any société to include a purpose statement. Italy introduced the società benefit in 2016.⁴⁷ In addition, the dominant scholarly opinion usually shares the view that any remaining doubt has been solved by means of Art. 2 LSC, a provision that is usually regarded as the final abandonment of the for-profit requirement for companies.⁴⁸ Art. 2 LSC establishes that private and public companies shall be deemed commercial in nature regardless of their objects (objeto social). The object refers to the activity undertaken by the company, as expressed by the articles of the association (Art. 23.b) LSC).⁴⁹ This differs from the for-profit cause of the company contract, usually referred to as fin social.

However, it may be argued that the provision does not fulfill such an ambitious function.⁵⁰ First, it ensures the applicability of commercial law provisions to companies, notwithstanding other considerations. In other words, companies qualify as merchants or businesspersons regardless of the type of activity they carry out. Second, it suggests that companies may pursue their for-profit purpose through any lawful activity (cualquiera que sea su objeto), which again does not exclude or abrogate profit, especially in a subjective sense.⁵¹ In turn, one could question whether an activity that cannot be feasibly expected to generate distributable profit can be chosen as part of a company’s objects.⁵² Meanwhile, the courts have not entirely endorsed the extensive approach to the concept of a company and have tended to favour a black-letter interpretation of the law.⁵³ The administrative authority responsible for the Commercial Register, the Dirección General de los Registros y del Notariado (DGRN), now known as the Dirección General de Seguridad Jurídica y Fe Pública (DGSJFP), was also reluctant to accept the scholarly-fostered proposal. This usually prevents the registration of provisions in the articles of association that are directly or indirectly incompatible with the for-profit requirement.⁵⁴ In a recent decision on December 17, 2020, the DGSJFP shifted its traditional approach toward a more flexible view.⁵⁵ Its position is grounded in the distinction between objective and subjective profit. The DGSJFP granted registration for a company even though the articles of association foresaw that profit would not be distributed among shareholders, thus abrogating subjective profit. Here, the DGSJFP interpreted Article 2 LSC in relation to Article 116.1 CdC in the sense that only objective profit, and not subjective profit, must be deemed as part of the cause of the company. Granting the registration of subjective not-for-profit companies is a rather formalistic way of providing a practical solution to the increasing role of benefit or hybrid models.⁵⁶

Accordingly, from a doctrinal perspective, commercial partnerships and companies may pursue nonprofit purposes. On this basis, scholars have envisaged the formation of non-profit companies under the Spanish law. In these companies, profit is amended or even abrogated, either in an objective or subjective sense, or even completely.⁵⁷ Additionally, only sporadic references may be found about hybrid entities in the scholarly literature, partially profit-seeking in nature and partially aimed at fostering other stakeholder interests. However, the worldwide regulatory trend of benefit companies has not gone unnoticed. Authors have typically assessed them in connection with either the interests of the company or corporate social responsibility issues.⁵⁸

3 Concept and Purpose of Benefit Corporations

Benefit companies are generally defined as hybrid companies.⁵⁹ Their hybrid character arises from the fact that they are partially for-profit and partially not-for-profit firms. The not-for-profit side builds on selecting one or more ideal or general interest purposes that the company purports to foster. Typically, one or more stakeholders are designated for a project. In the comparative framework, legal provisions on benefit company models sometimes include a general definition of public or general interests, followed by a non-exhaustive list of examples, including reducing a certain negative impact or the enhancement or protection of certain groups, entities, or communities, including artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific, or technological purposes (Art. 1, comma 378 legge 28 dicembre 2015, n. 208 and § 362(b) Delaware General Corporation Law). Most jurisdictions are familiar with this policy option, based on enumeration through the law of foundations, which typically foresees a similar list. In the case of Spain, this can be found in Art. 3.1 of Ley 50/2002, de 26 de diciembre, de Fundaciones (LF).⁶⁰

Under traditional for-profit models, not-for-profit or ideal purposes are generally alien to company law and must blend into the corporate entity. Under French-influenced systems, where the cause is essential to the contract, the hybrid character of benefit companies reflects on the cause: profit (Arts. 116.1 CdC, and 1665 CC) should be pursued together with other ideal, not-for-profit, or general interest goals.⁶¹ More precisely, in continental jurisdictions in which profit is still considered a core feature, benefit companies are typically considered to bring nuance to subjective profit but not necessarily to objective profit. By combining profit with a general interest goal, the company shall still be able to generate positive net income.⁶² If a broader notion of objective profit is preferred, the company will at least need to produce some kind of advantage or sufficient income to prevent it from being wound up and liquidated. This would have an impact on subjective profit and may prevent distribution among shareholders, which is an extremely controversial de lege lata.⁶³

The main difference from purely for-profit companies lies in the distribution of profits among shareholders. Benefit companies allocate earnings differently because the enhancement of a general or public benefit interest is balanced with the distribution of profits among shareholders. Benefit regulations enable the allocation of company resources in a manner that is forbidden or extremely uncertain under traditional for-profit models. The key policy change vis-à-vis for-profit forms lies in the possibility of assigning resources both to the distribution of profits and to the enhancement of a social interest or public benefit goal.⁶⁴ In turn, social interest is pursued in a similar manner as in the non-profit sector, with the exception that the entity is not subjected to a non-distribution constraint.

In addition to modifying the cause of the contract, other features of benefit companies must be reconciled with structural company law concepts. Under the Italian model, public benefit or interest is part of the company’s objective (objeto social). As described above, this refers to the activity by which the company’s purpose (cause or fin social) is implemented and achieved, and it is expressed in the articles of association (Art. 23.b) LSC).⁶⁵ Other jurisdictions include the general or public interest in the company by resourcing the so-called raison d’être.⁶⁶ This concept is alien to traditional company law, and may be introduced at the cost of legal certainty. For instance, the preamble of the Loi PACTE itself makes it clear that the raison d’être does not coincide with preexisting notions of company law, namely, the cause—fin social—or the object of the company—objet social. The latter consists of mandatory mentions of the company contract or the articles of association, as opposed to the raison d’être, which may be voluntarily included in the articles (Art. 1835 of the French Civil Code). This is followed by a provision that enabled directors to pursue them (Art. L-225-35, French Code of Commerce). A similar enabling provision for directors is also foreseen by systems that opt for an amendment of the company’s objects, such as Italy (Art. 1, comma 377 legge 28 dicembre 2015, n. 208). The concept of purpose or raison d’être, as understood in the benefit literature, is also alien to the Spanish tradition.⁶⁷ In addition, the comparative framework suggests that benefit companies may give rise to many different business models depending on the extent to which the public benefit or interest is actually embedded into the company’s activity. For this reason, assessing a hybrid model from a Spanish perspective would require the prior identification of such theoretical models.

The Spanish S.L.I.G. proposal seemingly envisaged a combined system, including both an amendment of the objects and a purpose provision. It foresaw that the articles of association mentioned one or several activities among the five alternatives (Art. 540.1 LSC-PLAAES).⁶⁸ These include (a) developing an economic activity to reduce or transform a specific social need, (b) providing goods or services to socially vulnerable collectives or individuals, (c) enhancing social opportunities for them, (d) preserving and improving the environment, and (e) collaborating with other social economy entities. Only the first alternative included a list of possible scopes of activity (health, education, culture, housing, and environment), similar to the Italian benefit model or the law of foundations (Art. 3.1 LF). Article 540.1 LSC-PLAAES foresaw that the articles of association transcribe one or more of the aforementioned options. This technique entailed a questionable restriction on freedom of contract within the articles. Presumably, the transcription was not intended to prevent the articles from mentioning a specific stakeholder, individual, collective, or economic potentially profitable activity that the company would carry out. Article 540.2 LSC-PLAAES also mentioned a so-called compromiso estatutario, referring to the founders’ commitment to creating a general interest impact on society. This compromise in the articles of the association may have been similar to an actual statement of purpose or raison d’être. However, the systematics of the provision made it unclear whether it actually referred to the company’s object.

4 Benefit Corporation Models

Until this point, the analysis shows that what is described as a benefit company may translate into several business models. In other words, a wide phenomenon may result from deploying company forms in pursuit of hybrid purposes. Models may vary depending on the way in which public benefit is embedded in the structure of the company.⁶⁹ This is one of the reasons why enacting benefit companies is technically challenging and why the language tends to be inaccurate or generic. Accordingly, we narrowed down the potential outcomes into three theoretical benefit-corporation models. Our taxonomy relies on concepts arising from the non-profit sector literature and appears to be consistent with recent developments in the law of benefit companies.

First, since de lege lata, the purpose or raison d’être of a company, is a concept alien to the Spanish system, we understand that an adaptation in this regard would have a very little actual normative impact [Model 1]. The company’s policy documents may refer to a broader goal or purpose to which the company is committed (typically, the environment or local communities affected by the activity). It is sometimes the case that this kind of formulation appears in board regulations (reglamento del consejo de administración) and is sometimes included in articles of association.⁷⁰ Such declarations do not typically affect the cause of the contracts. As long as the decision is within reason, it is assessed under the business judgment rule (Art. 226.1 LSC). Additionally, the scholarly understanding of the company’s interests is sufficiently broadly interpreted as accommodating business decisions based on environmental or societal demands, even from strict shareholder-value-oriented views.⁷¹ In larger undertakings, namely publicly listed companies, one additional reason why such provisions have a very little practical impact may correlate to the limited enforcement in continental public companies.⁷²

The second constellation designates benefit companies in which the protection or enhancement of the public interest is part of the company’s day-to-day activities [Model 2]. In this scenario, the company actively takes necessary or convenient actions to foster their selected interests. This would require directors to organise and allocate human and material resources, namely financial resources. In this scenario, activities aimed at protecting or enhancing public interest are not merely ancillary but are indeed sufficiently intense and prolonged in time to be a part of the company’s objects. The Spanish S.L.I.G. proposal took this approach by introducing specific amendments to the object provision in the articles of association (Art. 540 LSC-PLAAES).

This scenario can be implemented in two ways. In the first alternative, the enhancement of the general interest would require the company to use part of its resources to actively fund the social cause or stakeholders of their choice. This means that funds generated by profitable activities should be channeled to fund non-profitable purposes [Model 2.A]. This way of operating is familiar to non-profit law, which is generally referred to as a donative model (modelo dotacional).⁷³ As opposed to donating funds to a non-profit, financial resources would not be diverted to a third-sector entity but would be managed by the benefit company itself. The benefit company would allocate them directly in favour of the social interest of their choice and, by doing so, the company would be accomplishing its objectives. However, when assessing this model, it must be borne in mind that the benefit regulatory phenomenon aims to overcome a traditional donation-based system and some failures arising therefrom.⁷⁴ Under this model, articles of association would typically include a so-called plural object clause.⁷⁵ Additionally, an enabling provision for the distribution of profits may be needed.

The second alternative is one in which the only activity pursued by the benefit company effectively enhances or protects the social interest of its choice [2.B]. Under this model, the benefit company mimics social economy entities. Instead of channeling part of its earnings to foster social interest, the for-profit activity itself would fulfill this function. This could happen because the activity is undertaken in a specific manner to achieve this goal, or because the activity itself is suitable for it. The main concern of this model is the financial viability of the activity, which is usually sustained through profit reinvestment. The Spanish S.L.I.G. proposal seemed to be oriented toward this model (see Art. 540.1 and 541 under PLAAES), since no distinction was drawn between different activities within the objects. This model-based division is not clear-cut, but an entity may rather combine different models or switch from one model to another.

5 Obstacles in the Set-Up of Benefit Corporations

In this section, we explore the extent to which in-force Spanish company law provides leeway for party autonomy to set up the different benefit-corporation models described above. Here, a distinction can be drawn between theoretical admissibility and effective registration.

5.1 The Cause or Purpose of the Benefit Corporation

As stated above, setting up beneficial companies under the Spanish law would require an adaptation of the cause of the company contract to render it hybrid or dual.⁷⁶ Wherever the legal system identifies the cause of a company’s contract with the pursuit of profit, such an amendment is controversial. Spanish company law scholars regard this as admissible, but courts are reluctant.⁷⁷ However, under Spanish law, the cause of the company contract is not part of the articles of association and need not be expressed in any relevant company law document (contract or deed). In fact, only the objects of the company, as a means to achieve the company’s purpose (cause), must be in writing.⁷⁸ As a result, such an abstract adaptation of the cause of the contract may not pose any practical problems during the set-up. Another way forward could be seen in the fact that courts, but also the DGSJFP, usually claim that for-profit purposes shall prevail.⁷⁹ This assertion could be interpreted in the sense that as long as profit is not seriously compromised or completely abrogated, a benefit or hybrid model may be compatible with our system. On a different note, Member States may only provide for the nullity of a company on the grounds that the objects are unlawful or contrary to public policy (Art. 11.b.ii) Directive (EU) 2017/1132 and Article 56.1.e) LSC).⁸⁰ Since conditions for a company’s nullity must be narrowly interpreted, the prevailing scholarly opinion shares the view that an unlawful cause, even a not-for-profit one, does not call for the nullity of the company.⁸¹

A for-profit cause does not prevent companies from making contributions or donations to charitable initiatives or other general objectives. Such payments are usually considered lawful, provided that they are merely auxiliary or marginal, in the sense that they do not replace or hinder the regular business activities of the company.⁸² Consequently, the allocated amount is reasonable.⁸³ Such requirements are intended to protect minority shareholders’ rights, namely those of an economic nature (the right to receive distributed profits and the right to a share within liquidation).⁸⁴ Along this line, the articles of association may enable the company to allocate a small part of its annual profits to fund general interest initiatives.⁸⁵ The fact that such decisions and their corresponding provisions in the articles of association are admissible de lege lata enables entrepreneurs to adapt existing company forms to some of the features of benefit corporations without any prior legislative reform.

5.2 Objects of the Benefit Corporation

As analysed above, several jurisdictions require benefit companies to consistently adapt the provisions in the articles of association regarding their objects.⁸⁶ This regulatory technique blurs the difference between the objects and cause of the contract by gathering them in a single provision. De lege lata, the provision in the articles is only concerned with the former, namely, with the activity that the company carries to foster its purpose (Arts. 23.b) LSC y 117.1 RRM).⁸⁷ In this light, drafting the object provision in a benefit model may be problematic. The theoretical models described above may require that the relationship between for-profit and not-for-profit purposes be formulated differently. The same may apply to the various activities carried out to achieve each goal.⁸⁸ While Models 1 and 2.B may not raise any concerns in this regard, Model 2.A may require that the articles mention a non-profitable activity. In Spain, doubts typically arise on whether objects may only consist of economic activities. Scholars usually interpret Article 2 of the LSC as enabling any lawful activity to be included in this provision (cualquiera que sea su objeto).⁸⁹ However, courts and registrars tend to reject the idea that the articles include activities that are presumed to be unfit to generate profit, such as making donations or gifts.⁹⁰ This approach on their part is incorrect because it entails an ex ante examination of the entire business model, for which commercial registrars and courts are ill-equipped. Additionally, donations are deemed economic in nature for purposes of the EU law, at least on the free movement of capital.⁹¹

Whenever economic activity is carried out solely (Model 2.B), or a donation-based model (Model 2.A), it should be mentioned within the objects of the company. This provision defines the scope of the directors’ actions from an internal perspective ex Art. 9.1 Directive (EU) 2017/1132 (Art. 234.1.I and II LSC). The Spanish S.L.I.G. proposal considered this, since a few alternatives foreseen by Art. 540 LSC-PLAAES designated either economic activity (Art. 540.1.a) and c) LSC-PLAAES) or the type of goods and services that would be distributed (Art. 540.1.b) LSC-PLAAES). Presumably, founders would have had to replace the generic reference to an economic activity or product or service with the actual economic activity the company undertook. Under Model 2.A, the object provision mentions both for-profit and not-for-profit activities. Whenever a company carries out more than one activity, a complex or plural object provision may be foreseen.⁹² Complex object provisions allow for an extension of the scope of activity at risk of undermining the principle under which the objects should be sufficiently delimited in the articles (Art. 23.b) LSC).⁹³ However, the DGSJFP has a rather formalistic view and considers a provision to be in compliance with this principle as long as it mentions activities among the ones listed in the Clasificación Nacional de Actividades Económicas (CNAE).⁹⁴

On contributions to non-profit organisations or donations within the objects, two additional considerations can be made. First, in for-profit models, donations are not usually part of the objects, but rather auxiliary activities; for this reason, they typically need not be reflected in articles.⁹⁵ Second, because of reluctance toward such a provision, Model 2.A may confront more obstacles de lege lata than other alternatives. This should not raise excessive concern since a similar result may be achieved through a provision on the distribution of profits. In their turn, Lab B’s amendment to the articles concerning the object advances a different approach, one that is similar to Art. 1833.II of the French Civil Code. In addition, whatever activity the company may carry out, a reference to the creation of a positive social impact, namely, on the environment, shall be included.

6 Finance

The financial aspects of benefit companies may vary from one model to another. Typically, regulations on the matter balance the distribution of profits among shareholders with the encouragement of the general interest reflected in the articles, which also appears consistent with the prevailing view in the fourth sector.⁹⁶ This is usually pursued through a legal provision that sets the percentage of distributable profit. Under the Spanish S.L.I.G. proposal, only 30% of profits (beneficio) could be distributed, while 70% would have to be reinvested or dedicated to reserves (Art. 541 LSC-PLAAES). An exception may be made if less than 30% of the profits were distributed in the two preceding years (Art. 541.II LSC-PLAAES). The proposal can be improved by clarifying the concepts of profit and reinvestment. First, such a provision should coordinate with Article 273.2 LSC, subordinating any distribution to prior covering of the legal reserves as well as reserves provided for in the articles of association, and forbidding distributions that reduce net equity (patrimonio neto) under share capital. Consequently, doubts arise as to whether the reinvestment quota would be calculated based on distributable profits. In this case, an express mention is advisable. The interaction of this 30/70 allocation system with other provisions set forth in the articles (additional reserves, founders’ or shareholders’ preferential rights, or directors’ remuneration based on profits) may also have called for additional consideration.

In addition, the meaning of reinvestment is controversial since the proposal itself foresaw it in opposition to covering reserves. By opposing them, Article 541 LSC-PLAAES diverged from Article 57.5 of Ley 27/1999: not-for-profit cooperative societies may create a special reserve for non-distributable profits for reinvestment purposes, which are intended to help the cooperative establish itself in the market and improve its services. When opposed to covering reserves, reinvestment would then be interpreted as actively dedicated resources for the enhancement of the not-for-profit purpose. This means that a large percentage of profits can potentially be extracted from the company every financial year. If this were the case, further clarification would be required to specify how profits should be reinvested in a way that ensures the enhancement of the general interest or the protection of individuals and collectives selected in the articles of association. Provisions in the articles, shareholder’s instructions to directors’ (Art. 161 LSC), or simply a decision of the General Meeting would be required.

In essence, different forms of ex-ante shareholder engagement could limit the risk of insider abuse in a model that provides a sort of carte blanche to allocate a large fraction of profits in activities and initiatives that may have only been vaguely described. Article 541 LSC-PLAAES would also need to coordinate with Art. 348 bis LSC, granting an exit right to shareholders in the event that profits are not sufficiently distributed.⁹⁷ Here, policy alternatives range from excluding the application of Art. 348 bis LSC in benefit regulations or narrowing its scope to profits that may be effectively distributed under benefit regulations (30%) to leaving the matter to the articles of association. Under Art. 348 bis LSC, this exit right can be abrogated by articles of association either after a unanimous shareholders vote or by granting an exit right to shareholders who voted against its exclusion.

Under the current regulations, scholars share the view that a fraction of annual profits may be allocated to social or general interest initiatives.⁹⁸ The DGSJFP agrees that articles of association can foresee a provision of the kind (for instance, establishing a percentage) subject to the same criteria applied to donations.⁹⁹ This means that only a small fraction of profits may be dedicated to not-for-profit purposes to preserve the for-profit goal and shareholders’ economic rights. The DGSJFP arguably conceives of these provisions as simply enabling, but not necessarily binding, for the Ordinary General Meeting when deciding on how annual results should be distributed (Art. 273 LSC).¹⁰⁰ To our understanding, this may depend on the wording of the provision, which may simply be enabling or mandatory. What is still controversial is that the majority is required to amend the articles of association to introduce it, that is, whether a unanimous vote is required or whether a qualified majority would suffice.¹⁰¹

Furthermore, as long as the not-for-profit goal is formulated in broad terms, the provision is not bound to create a third party right to effectively perceive profit. Doubts may arise whenever the articles refer expressly to an organisation or to an individual (for instance, a foundation; see also Art. 540.2.b) LSC-PLAAES referring to “individuals”). De lege lata, the DGSJFP opposes the view that third-party rights may be created in this way.¹⁰² The abovementioned considerations may reflect differently on the various business models that a benefit company could adopt. Since Model 2.B includes not-for-profit activity as part of the objects, one could argue that profits may be dedicated to it in the same way as for-profit activity. Model 2. On the contrary, A typically relies on this type of ex ante solution.

7 Governance

As far as governance is concerned, regulations on benefit companies typically assess directors’ duties and shareholder protection mechanisms.

7.1 Directors’ Duties

Benefit regulations usually include a legal provision that enables directors to pursue general interests or not-for-profit purposes. This typically includes a reference to the interest of the company that opts for a stakeholder approach and sometimes even departs from the maximisation of shareholder value (for Italy, Art. 1, comma 377 legge 28 dicembre 2015, n. 208; for the Spanish S.L.I.G., Art. 543 LSC-PLAAES).¹⁰³ Under in-force Spanish company law, shareholder value is deemed compatible with the directors’ consideration of other stakeholders’ interests that, if ignored or not properly accounted for, may generate reputational damage or other sort of negative impact on the company.¹⁰⁴ The latter may also be formulated positively; as long as stakeholder concerns are not detrimental to value creation, the decision is protected by the business judgment rule.¹⁰⁵ Assuming the decision is not immediately profit-maximising or requires long-term engagement, it can still be deemed compatible with the company’s interest on the grounds of a long-term maximisation value approach.¹⁰⁶

Disregarding environmental and community concerns may push the decision away from the scope of the business judgment rule (Art. 226.1 LSC). This may happen because the procedural prongs of the business judgment rule may not be fulfilled if the decision fails to adequately assess environmental or societal impacts.¹⁰⁷ Under Art. 226.1 LSC, these are formulated as adequate decision-making procedures and suitable information.¹⁰⁸ This approach is similar to what has been described as a benefit–judgment rule.¹⁰⁹ Provided that a wider range of potential decisions are available to reconcile profit and purpose, and the directors are required to balance the different interests at stake, scholars have suggested that the focus should be placed on the procedural aspects of the decision, rather than on the merits thereof.¹¹⁰ This approach is sometimes criticised because it provides excessive leeway for directors.¹¹¹ However, one could question whether a decision that needs to balance several interests (here, the shareholders’ and the stakeholders’ interests)—rather than only one—would actually allow directors to choose among a larger number of potential outcomes. Arguably, in some cases, the need to consider stakeholder interests would narrow their options. Legislative amendments to provide express authorisation for directors to consider stakeholder interests have sometimes been disregarded because they generate balancing costs for directors.¹¹² A similar assessment may be made on the multi-stakeholder provision fostered by B Lab, in which the interests of employees, clients, suppliers, and other parties, such as local communities, the environment, and both long-and short-term interests should be envisioned. However, scholars generally consider such provisions to be voluntary.¹¹³

7.2 Shareholder Protection

Shareholder protection in benefit companies aims to ensure that the company’s essential features are not altered without shareholder consent or other adequate balancing mechanisms. However, the kind of concerns that arise when turning traditional for-profit company models into benefit corporations also reflect on the proper way to protect shareholders. If the cause of a company contract is altered, a unanimous vote is required.¹¹⁴ This result is justified from the perspective of both company law and contract law. Under contract law provisions, an amendment to the cause of the contract requires unanimous consent (Art. 1256 CC).¹¹⁵ The result could also be achieved through company law provisions by conceding that the alteration of the for-profit cause directly affects an individual shareholder right (Art. 292 LSC): the right to participate in the distribution of profits (Art. 93 LSC).¹¹⁶ The second solution is slightly more controversial because it leads to an ongoing discussion on whether shareholders may forego this right ex ante.¹¹⁷ Nevertheless, it could be argued that such an amendment will not abrogate or exclude the right to participate in the distribution of profits. Instead, it would only lead to a reduction in potentially distributable profits, directly affecting the right, but not requiring shareholders to waive it. This requirement is also considered applicable when the articles of association are amended to include a stakeholder interest provision.¹¹⁸ If only the objects of the company are concerned, a substantial amendment of the articles of association gives rise to an exit right (Art. 346.1.a) LSC).¹¹⁹ Extending the scope of the objects by including a not-for-profit activity (Model 2.A), provided that this option is admissible, qualifies as a substantial amendment to the provision. Consequently, shareholders who opposed it enjoyed a sell-out right or appraisal.

Benefit regulations usually foresee an exit right, which is triggered by the conversion of a for-profit company into a benefit one and vice versa (§ 363(b) 1 DGCL; Art. 544 LSC-PLAAES).¹²⁰ As has been noted, an exit right may be an adequate protective mechanism against amendments to the objects, but insufficient if the company’s structure is altered in a more significant way. If a hybrid purpose is instated, even if only an amendment of the articles is formally proposed, a material change in the cause of the company may effectively take place, and consistently, every shareholder’s consent would be required.¹²¹ Sporadically, the authors considered that an exit right may suffice.¹²²

8 Registration

The obstacles that entrepreneurs may face in the process of registering a benefit corporation in Spain have been assessed throughout the chapter. As described, these are usually derived from strict registrar control, which in turn is supported by DGSJFP’s conception of profit as an essential element of Spanish company law. Scholarly consensus on the need to overcome for-profit requirements does not necessarily result in the successful registration of hybrid companies. Controversial issues at a registration state would typically include mentioning not-for-profit activities as part of the objects and other provisions in the articles of association that are deemed incompatible with profit-making, such as provisions allocating a large fraction of earnings to non-profit or general interest initiatives.

9 Specific Tax Treatment

As Spain has not adopted specific regulations on benefit companies or similar hybrid models, no specific tax treatment exists. Donations and other contributions to not-for-profit initiatives by for-profit companies are tax-deductible under company tax regulations.¹²³ Both public and private companies can benefit from this tax incentive. However, undertakings operating as S.A. and S.L. are excluded from the special tax regime foreseen for not-for-profit entities. Only not-for-profit entities and other organisations are listed in Article 16.a) LIFM in relation to Art. 2 LIFM may enjoy it. Extending it to benefit corporations formed as public or private companies would require prior legislative reforms. This claim is supported by benefit corporation advocates, who have traditionally demanded tax authorities and policymakers to include for-profit companies operating in a sustainable, stakeholder-friendly manner, in the same tax regime as non-profit organisations. In turn, the S.L.I.G. proposal was largely concerned with tax benefits, not only for the benefit company itself, but also for so-called social enterprise proximity investors (Art. 4 PLAAIS). However, these provisions were designed under a company tax regime that is no longer in force.¹²⁴